Biden administration targets Big Booze as part of antitrust probe

The North Bay’s massive alcoholic beverage industry is bracing for what could be a wave of regulatory overhauls as President Joe Biden seeks to increase competition in a beer, wine and spirits market that is increasingly controlled by a handful of big companies.

Noting the past of such trust-busting presidents as Theodore Roosevelt and Franklin D. Roosevelt, Biden said last month it is again time to rein in companies that have gotten too big at the expense of competitors and consumers. While Big Tech companies such as Facebook and Google have drawn plenty of attention, the administration also has its eyes on Big Ag and Big Pharma.

“Rather than competing for consumers, they are consuming their competitors,” Biden said in a July 9 announcement of an executive order directing a dozen federal agencies to review competitive economic barriers. “Rather than competing for workers, they’re finding ways to gain the upper hand on labor. And too often, the government has actually made it harder for new companies to break in and compete.”

That regulatory review includes Big Booze.

As part of his initiative, Biden instructed the Treasury Department to submit a report to the White House on the status of competition in beer, wine, and spirits and whether there are barriers that “hinder smaller and independent businesses or new entrants from distributing their products.” He also instructed the Alcohol and Tobacco Tax and Trade Bureau — which is under the Treasury Department — to update its regulations for “rescinding or revising any regulations of the beer, wine, and spirits industries that may unnecessarily inhibit competition.” There have been more than 120 comments filed as of Thursday on the topic.

Any possible action could have major ripple effects locally as Sonoma and Napa counties are at the heart of the premium US wine business, contributing to a multibillion-dollar economic impact regionally.

This probe comes exactly as there has been massive mergers-and-acquisition activity in the local wine business during the first half of the year, most notably when E. & J. Gallo Winery in January completed an acquisition of low-price wine brands from Constellation Brands Inc. in a blockbuster $810 million deal.

Sonoma County also is home to around 30 craft brewers who are navigating a tough marketplace that has been long dominated by Anheuser-Busch InBev, which had a 39% market share last year, though that was down from almost half 10 years ago. Even one of the biggest craft beer companies, Lagunitas Brewing Co. of Petaluma, is still a small fish in the American beer landscape as its parent company, Heineken USA, has only a 3.2% overall share.

There also are about two dozen Sonoma County distillers that have to compete against international behemoths such as Diageo, Beam Suntory and Bacardi USA.

“I think this is very serious. Will it ultimately make a difference? It really depends,” said Robert Tobiassen, president of the National Association of Beverage Importers and who also was chief counsel at the Alcohol and Tobacco Tax and Trade Bureau.

If the Biden initiative does have an effect, such actions could benefit businesses such as Third Street Aleworks of Santa Rosa, a microbrewery that has been in business more than 25 years and went under an ownership change two years ago.

Third Street has had some success during the pandemic by pivoting more to retail sales, which now account for about 80% of its beer sales. Before the pandemic, it sold only about 10% through stores and taprooms as opposed to its downtown brewpub, said Chris Frederick, managing partner.

The Santa Rosa brewery has been able to expand into the Sacramento area and now has three salespeople. It has been self-distributing its beer rather than relying on wholesalers that largely control the retail system under the three-tier system (producers, distributors, retailers) that arose in the aftermath of Prohibition and the 21st Amendment. Third Street has found smaller grocers such as Molsberry Market and Oliver’s more receptive to stocking its products compared to the big chains.

With retail shelf space limited, it can be harder for smaller or independent alcohol producers to break through with retailers and large distributors that are heavily reliant on the alcohol industry’s largest players for the bulk of their revenue. The leverage enjoyed by the biggest players with the broadest portfolio of products combines to make it difficult for upstarts to break through.

“When it comes to comes to the system set up for beer, it hasn’t been easy for us to break into those big box stores,” Frederick said. “A lot of that retail space is controlled by the distributorships.”

Beer distribution has been consolidating, as well, to the concern of smaller breweries. For example, the Reyes Beer Division has been growing quickly in the state, expanding into Northern California almost two years ago with its latest acquisition this year in the Redding area. At the end of last year, Reyes had 24 California distribution facilities. Its parent company, Reyes Holdings Inc., is the largest beer distributor in the country.

A law review paper this year by Daniel Croxall, a professor at University of the Pacific who created the first craft beer law class, highlighted Reyes’ control over the Golden State beer market. It was estimated to distribute 100 million cases of beer in California, about one-third of all beer sold in the state, Croxall wrote.

“Distribution consolidation is not a California phenomenon and is occurring nationwide. Given the difficulty of an independent craft brewery getting its product to market, this consolidation only makes it harder for the little guy,” he wrote.

Distribution is likely to be a key focus of the Biden probe, analysts said, as there is a similar concentration within the wine-and-spirits wholesaler market. The number of wine wholesalers has decreased by 75% since the 1970s, according to authors Paul Wagner, John Crotts and Byron Marlowe in their 2019 book about wine sales. And three distributors — Southern Glazers’ Wine and Spirits; Breakthru Beverage Group and Young’s Market Co. — control almost 50% of that market.

In fact, the wine wholesaling market is so tough to crack that Foley Family Wines of Santa Rosa in February sold its distribution arm, Epic Wines & Spirits of Santa Rosa, to Southern Glazer’s for an undisclosed amount. Founder Bill Foley told The Press Democrat he was glad to get out of the distribution business because it had been “a real grind” during the pandemic.

During the Trump administration, the Federal Trade Commission was so concerned over a proposed merger between Republic National Distributing Company and Breakthru that it raised significant objections as the agency believed it “likely would have resulted in higher prices and diminished service in the distribution of wine and spirits in several states.” The two distributors abandoned their talks in 2019.

Lobbyists are already geared up. The Wine & Spirit Wholesalers of America, the industry’s trade group, expressed caution in a statement over the Biden initiative, noting that current regulations have “created the safest, most competitive, and most successful alcohol marketplace in the world.”

In wholesaling, regulators are looking at how much control a distributor has in each particular state and that proposed market share doomed the Republic-Breakthru merger, Tobiassen said. “The assumption is too much market control does hurt consumers. If you are becoming a behemoth, but you are not in one individual market gaining a huge control over the marketplace, then under antitrust law they have been saying it’s OK,” he said.

But given the new scrutiny under Biden, past assumptions may change. The new FTC Chairwoman Lina Khan has been a critic of anticompetitive behavior, especially with Amazon’s control over digital retailing.

One potential focus of the renewed oversight may be Gallo, the country’s largest wine company that produced an estimated 88 million cases last year, according to Wine Business Monthly. It had to shrink its original deal with Constellation to gain approval, jettisoning pickups in the sparkling wine and brandy categories after objections were raised. The deal took 18 months to pass muster with the FTC and had to be reduced by about $900 million.

The Modesto-based company is likely to be much more gun-shy in pulling more any more deals in the wine market, analysts said. In the aftermath of the deal, Gallo brands represent almost 30% of all bottles of wine produced in California — up from 24.4% — while Constellation dropped from 12% to 6.5% of the state’s wine production, according to bw166, a beverage alcohol consulting firm. Overall, four wine companies operating in the United States — Gallo, Constellation, The Wine Group and Treasury Wine Estates — are expected to generate almost 50% of the industry’s revenue this year, according to IBIS World, a global research firm.

“The landscape is changing so quickly,” Tobiassen said.

Executives at wine companies will now have to weigh whether their deals have the potential to get scuttled or delayed over antitrust concerns, said Rob McMillan, executive vice president of Silicon Valley Bank’s wine division. That comes as some companies are looking to acquire more wineries, especially as the Duckhorn Portfolio of St. Helena and Vintage Wine Estates of Santa Rosa have become publicly traded companies this spring to generate cash for more purchases.

“There is going to be no more rubber-stamping,” McMillan said.

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.